First Australian export LNG plant could close within 3 years

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The Australian CSG-to-LNG industry facing crisis, with reduced demand, and high capital and operating costs. Write downs and closures may be imminent.

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b88459876z1_20161128112647_000ga8drik92-0-skkrpjdoqiwhjm62bn2_fct1820x1354x139x14_ct460x345The Australian Coal Seam Gas (CSG)-to-Liquid-Natural-Gas (LNG) industry began auspiciously, with its champions promising export revenue, royalties and jobs.

The three plants at Gladstone were built during one of the great resource booms of the past 100 years. Demand out of Asia for LNG appeared almost limitless at the beginning of this decade.

However, demand by the world’s largest LNG importer, Japan, has been shrinking, and growth in China and other emerging markets has failed to keep up with the boom in supply. Nominal global liquefaction capacity closed 2016 significantly oversupplied— 29 per cent above demand, and the gap between supply and demand widened over the year despite very low prices.

Even with growth in some emerging markets, and growth in some developed markets like South Korean and Taiwan, the global LNG market remains significantly over supplied.

This glut in global supply will very likely deepen, until 2020 at least, by which time supply will have increased by 34 per cent to 456 MTPA. Global demand will simply not take up the slack.

IEEFA expects that the expanding glut will put relentless downward pressure on prices and lead to many contract defaults and renegotiations.

It is a truism in the LNG supply industry that the product is expensive to store, so the glut we describe in this paper can only be resolved by LNG processing capacity being curtailed.

In all resource markets, highest-cost producers have to curtail production first.

The three Gladstone plants sit at the very apex of the global cost curve, so these plants that will feel the pressure to shut in capacity most acutely. IEEFA expects some liquefaction trains at Gladstone to cease production altogether over the next two years.

The LNG industry in Eastern Australia is fundamentally weak because its elements were developed in the wrong order.

Export contracts were secured, plants were approved with no consideration of the domestic market, plants were built and finally gas fields were developed. Along the way, the gas industry failed to contain the cost of building three plants concurrently, a misstep that led to globally uncompetitive capital costs.

The industry found that when it went to drill for gas— after having secured gas contracts and built the plants—that the CSG fields that were expected to supply the plaints failed to produce the gas expected.

Capital costs of the plants at Gladstone, and operating costs of the gas fields that supply Gladstone, are globally uncompetitive.

What is particularly worrying for the industry in this case is that the very best CSG fields have been drilled, and costs will rise further from here.

IEEFA estimates that if Santos were to write down the value of its Gladstone investment, GLNG, to global comparatives it would amount to a write off up to $3.3 billion. Origin Energy would face write downs of a similar magnitude on its investment in APLNG.

Source: IEEFA. Reproduced with permission.

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14 Comments
  1. ROSSC 2 years ago

    Wow, thats a surprise…Not

  2. phred01 2 years ago

    Going to close in 3yrs this is enure that domestic prices remain high

  3. John Saint-Smith 2 years ago

    I hear the distant hoof beats of a solar hydrogen generation knight riding in to save the foolish LNG infrastructure.

  4. JohnRD 2 years ago

    does nothing to reduce emissions due to the use of LNG though.

  5. GlennM 2 years ago

    Could not have happened to nicer people….

  6. David leitch 2 years ago

    The capital costs of building the plant are irrelevant to the decision on staying open or not. That just depends on revenue v variable costs.

    In Asian markets Australian CSG LNG is roughly competitive with USA lng on variable cost (no more than $1 gj difference in net back margin).

    At current oil prices aplng is just about producing enough cash to pay off its project debt on my numbers.

    • Radbug 2 years ago

      Markets run down a river of hope. Don’t be the last man out the exit, David.

  7. George Darroch 2 years ago

    Meanwhile Victoria have just announced they want to build one. Something’s wrong here.

    • Mike Shackleton 2 years ago

      Don’t they want to build an import terminal?

      • Chris Fraser 2 years ago

        Possibly, but it wouldn’t make sense, I hear there’s plenty of LNG available by land routes.

        • Mike Shackleton 2 years ago

          Dan Andrews made an announcement today about investigating the options for gas imports into Victoria to compete with domestic wholesale supplies.

          • Chris Fraser 2 years ago

            Maybe Gorgon and Gladstone could compete with the locals ? The use of LNG ships means there are probably no trains that could liquefy it.

  8. Joe 2 years ago

    Add this to the list of stranded assets. I suppose they could turn it into a future tourist attraction, a memorial perhaps to the era of Big Fossil Fuel and the stampede to cash in before it all turned to shite.

  9. Just_Chris 2 years ago

    I wonder if they could modify one plant to make liquid hydrogen? I’m sure with all those looking for a pathway to meet the Paris targets hydrogen produced from Australian renewable energy would be an attractive alternative to LNG.

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